Analysis

Richard WestcottBBC transport correspondent

This comes down to whether FirstGroup can deliver on its promise to attract millions more customers to the West Coast mainline.

The company will have to find an average of about £390m a year in premium payments to the government (it's much less at the start of the franchise and gets much bigger as the years roll on). Virgin currently pays about £160m.

If FirstGroup struggles, it could be forced to hand back the franchise early, which will cost it a lot of money and could put its other UK franchises at risk.

There is a lot at stake, for the company and the government.

Sir Richard Branson thinks the deal is doomed to failure. FirstGroup, which is already the biggest rail operator in the UK, begs to differ.

As they say, time will tell.

The government says FirstGroup's new trains should add further 12,000 seats a day on West Coast routes from 2016.

FirstGroup's chief executive Tim O'Toole said it was a good deal for the company and the public.

"Our bid also delivers value for taxpayers by returning premiums to the government underpinned by sustainable growth in passenger numbers and revenues from the utilisation of significant available capacity," he said.

Higher payments

First West Coast says it will return £5.5bn at net present value to the government over the franchise term.

That is believed to have been much higher than the amount offered by Virgin Rail, which is 49%-owned by another transport company, Stagecoach.

In a statement, Stagecoach said the reason it had failed to secure the new franchise was because FirstGroup had contracted to pay "significantly higher premium payments" to the Department for Transport.

BBC transport correspondent Richard Westcott says the West Coast franchise is the first of several big rail franchises up for grabs over the next few years, and the government is under pressure to get a good deal.

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But there are concerns that FirstGroup may have bid too much for the franchise.

"There have been many examples… where there have been very aggressive bids which the government has awarded and then quite soon afterwards, the people have handed back the keys and walked away from the contract without any real penalty," said Stephen Glaister, Professor of Transport and Infrastructure at Imperial College London.

"That's a very unsatisfactory situation from a public interest point of view."

As part of its contract, First West Coast would have to pay £265m in penalties if it were to terminate the contract early or fail to make scheduled payments to the government.

The trade unions have also warned FirstGroup that they will vigorously resist any attempts to reduce running costs by cutting pay or working conditions.

RMT general secretary Bob Crow said: "They should be left in no doubt that we will mount a massive industrial, political and public campaign to stop any attacks on our members' jobs and the services that they provide to the travelling public."

'Bitterly disappointed'

Sir Richard Branson's Virgin Rail has operated the West Coast franchise since 1997 after the privatisation of UK railways.

He said said Virgin's loss of the franchise was "very disappointing news" and added that his company's bid had been a realistic one.

"We did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise, as happened to GNER and National Express who overbid on the East Coast mainline," said Sir Richard in a statement.

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"It's a shame really, we're used to Virgin"

Three years ago, the government stripped National Express of the franchise to run the East Coast Mainline for failing to make payments promised to the government under its contract.

"Sadly, the government has chosen to take that risk with FirstGroup and we only hope they will continue to drive dramatic improvements on this line for years to come without letting everybody down," Sir Richard added.

He said the government's current bid process was "flawed" and that Virgin Rail was extremely unlikely to bid again for a franchise.

"The process is too costly and uncertain, with our latest bid costing £14m. We have made realistic offers for the East Coast twice before, which were rejected by the Department for Transport for completely unrealistic ones, and therefore will have to think hard before embarking on another bid."

"After 15 years, it is difficult to imagine a West Coast rail service without the Virgin brand."

Track record

Successive governments have had a poor track record in awarding rail franchises.

In some cases, train operating companies have defaulted on their contracted payments to the government. This was the case with Bermuda-based Sea Containers and National Express, the successive operators of the East Coast Mainline before it was temporarily re-nationalised last year.

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Tim O'Toole, FirstGroup: "It's good for the passengers"

In many other instances, companies manage to meet their annual payments while making losses.

Under what is known as the revenue support scheme, the government takes on 80% of the company's losses. Stagecoach's East Midlands Trains and Arriva's Cross Country Trains are both being subsidised by taxpayers.

FirstGroup's own First Great Western Trains was in revenue support before it handed back the franchise last year.

However, under the current government franchise contracts, companies will not be offered this option. Instead, they will have to hand back the franchise, which will be re-auctioned by the government.

That raises the stakes for FirstGroup.

"Economists have openly said that if FirstGroup have got this wrong, it will probably kill off the group. Some people are saying they've bet the farm and everything they own on it," said Tony Miles of Modern Railways magazine.

Economic conditions have already worsened since FirstGroup submitted its bid. At the time, the economy was forecast to grow 0.3%, whereas now the government forecasts stagnation.

FirstGroup investors appeared to be unconvinced by the deal. Shares in the company were down 7% in late London trade. Shares in Virgin Rail partner Stagecoach rose 2%.

Comments

Comment number 1162.

CCB15th August 2012 - 15:39

I'm maddened by this stupid decision. I've travelled on the Virgin Euston to Manchester route regularly for years and think the service is reliable and good value. It works so why 'fix it'? Whereas the only experience I've had of First Group is a few weeks ago travelling from Manchester to Bolton. It was chaos, overcrowded, expensive. I dread to think what they'll do to the West Coast Line.

Comment number 1161.

Ken Watt15th August 2012 - 15:43

Given that the Tories privatised the public railways in order, they said, to provide competition and provide better value for money for consumers why are they now eager to create private monopolies and destroy competiton?

Comment number 1160.

Four_Winds15th August 2012 - 15:42

I used to work for the corporate side of one of the Virgin companies...That 'oh so nice' Mr Branson will be tearing off some staff limbs and heads, and eating them in front of the unfortunate ones because of this ;)

Comment number 1158.

Neil Smith15th August 2012 - 15:42

just look at the hugely overpriced and awful service First provides on the Cardiff London line. obviously this rubbish service is the "brown" standard for UK rail. the most expensive and least prompt in the whole of Europe. thanks.

Comment number 1157.

Justin15015th August 2012 - 15:41

#1088 There are two separate reports (1 under Tory govt and 1 under Lab govt) which rejected ATP on grounds of cost/benefit. In 1997 cost was over £1b, lives it would have saved in last 15 years - under 40. Cost per live saved £25m+. That is not cost effective

Comment number 1152.

47484IKB15th August 2012 - 15:39

Given Firstgroup's shambolic handling of the Great Western franchise how on earth have they won one of the UK's flagship routes? This just makes a mockery of the tendering process. Expect more fare increases with an expectation of the government stepping in when it goes wrong.

Comment number 1151.

Tio Terry15th August 2012 - 15:39

1134.coram-populo-2010 I am all in favour of a seat for everyone, however there are problems. For a single journey mainline service it's pretty simple to sell the reservation with the ticket - like an airline. With turn up and go and season tickets it's somewhat more difficult because you have no idea who's going to turn up when. Dont know how to resolve that!

Comment number 1149.

Imatroll9915th August 2012 - 15:38

What a shame for west coast passengers. Now they will be delighted by the First Great Western experience of filthy trains and lousy services. If ever there was a reason to nationalise the railways it would be to put Virgin in charge of it all. Sorry to see you treated badly like this Virgin.

Comment number 1148.

TheGrassAintGreener15th August 2012 - 15:38

I quite liked the Virgin trains, and though I never used them frequently, I had a good experience on my journey.

I think the government got way ahead of itself with it's decision. It's suppose to provide the best service, and with so many commuters complaining about late running trains from FirstGroup, I can't see how this helps the situation.

Comment number 1146.

Jane Metcalfe15th August 2012 - 15:36

I don't use the train to commute now but I used to before I moved permanently to Carlisle..a lot, from Preston every Friday night. This was in the early 2000s, before the full upgrade of the West Coast Mainline (that Virgin Trains instigated..how ironic) and I can honestly say, I loved every minute of it. I am most upset that they have lost the franchise as you cannot improve on perfection. :-(

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